Bitcoin Correlations to Macro Environment: Gold and Yuan Standouts

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Posted onJan 28, 2016

In August 2015, we published an analysis that highlighted the correlation between the price of bitcoin and various other financial markets. Notably, we found a strong inverse relationship between bitcoin and gold prices. As noted in August, “the historical positive correlation with gold has turned decisively negative, and currently stands at -0.58.”

Given the dramatic impact macro indicators such as those outlined previously could have on the relatively small bitcoin market, we elected to revisit the analysis with data extended up to present day. Notably, the gold-bitcoin inverse relationship not only continued, but actually amplified. The trailing 12-month correlation coefficient now stands at -0.70, among the highest of all financial assets included in the analysis.

The chart below illustrates the one year price of bitcoin and gold, starting January 2015. Interestingly, it calls into question whether the recent price drop in bitcoin was attributable solely to the departure of a long-time influencer, or perhaps also somewhat compounded by broader macro market events that drove gold up ~5%, off of 6-year lows, in the days preceding that announcement.

Upon revisiting the analysis, we expanded the list of financial assets to include measures of volatility (VIX Index) and global currencies (CNY, EUR & GBP), adding to the existing group that included equities and Treasury securities over the same 12-month period. Of all financial assets, the Chinese Offshore Yuan (in USD terms) was found to have the strongest correlation with bitcoin, underscored by a correlation coefficient of +0.72. For reference, the correlation with CNY (Onshore Yuan) was similar at +0.68.

The chart above represents the one year price of bitcoin and offshore Yuan, starting January 2015.
Notably, the Yuan data is in terms of USD/CNH, implying that a weaker Yuan is correlated with higher bitcoin prices. Given recent macro concerns within China, the subsequent devaluation of the Yuan, and significant relative volume in XBT/CNY markets, there is likely some truth to the argument that China has been a driving factor in the 45% increase in bitcoin prices since August 2015. Worth also noting that certain micro shocks (i.e. the dramatic Yuan devaluation in August) did not immediately correspond with higher bitcoin prices, but the longer term trend and provable mathematical correlation indicate that the relationship is worth keeping an eye on.

Lastly, it appears bitcoin price movements are generally uncorrelated with the VIX Index (a measure of the implied volatility of S&P 500 options) and equity indices in both China and the US. Additionally, bitcoin’s seemingly positive correlation with Treasury yields has weakened since the August publication, but remains positive at 0.30; a Treasury sell-off or rising yields (presumably in a ‘risk-on’ environment) is modestly correlated with higher bitcoin prices. The chart below summarizes the correlation coefficients across various financial markets.

Endnote:
Note, ±0.20 is statistically significant level for the correlation analysis. The correlation figures are based on the Pearson Product-Moment correlation coefficients. Assumptions: 100 DF and 95% confidence interval.